Environmental Liability in the 90’s

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Volume II, Number 3 – April/May 1993

© Donlevy-Rosen & Rosen, P.A.

BACKGROUND. As we move into the next century, the environmental liability outlook for American business is foreboding at best. Environmental regulation is mushrooming on federal, state and local levels, exposing us to enormous civil liability in the form of clean up costs, penalties, and third party claims, as well as potential criminal liability.

To complicate matters, both federal and state standards are often applicable concurrently in a given situation. In many instances, state standards exceed those set by the federal Environmental Protection Agency (“EPA”), the agency charged with implementing and enforcing federal environmental law. If this sounds confusing, it is because the many and evolving sources of environmental liability and competing jurisdictions make it so. However, the first rule in addressing issues of environmental liability is not to assume that a potential problem will go away. Such a strategy courts epic disaster.

apn2-3This issue discusses the basic federal environmental regulatory scheme and highlights some of the pitfalls which could result in personal liability. While no analysis is made of applicable state or local laws, suffice it to say that if a problem exists or liability attaches under federal law, there will often be ramifications on the state and local level as well. In such situations, it is advisable to consult with experienced environmental legal counsel in conjunction with a reputable environmental engineer.

PRIMARY LAW. While there are several major federal environmental statutes on the books, the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (“CERCLA“), is the centerpiece of the federal environmental arsenal. It is the primary federal statute which may result in personal liability from the acquisition, ownership or operation of real property. CERCLA, also referred to as “Superfund,” sets forth a complex and unforgiving regulatory scheme to identify, investigate, analyze and remediate property contaminated with hazardous waste.

WHO IS LIABLEI’m not operating a hazardous waste landfill, why should I be concerned about CERCLA? A somewhat intuitive inquiry, but, as you’ll see, liability under CERCLA is anything but intuitive. CERCLA nominally assigns four categories of persons as potentially responsible parties (“PRPs”): (i) current owners or operators; (ii) past owners if they owned or operated the property at the time of the hazardous contamination; (iii) generators and possessors of hazardous substances who arranged for disposal, treatment or transport; and (iv) certain transporters of hazardous substances. In addition, courts have also found the following persons liable: lessees of contaminated property; lessors (owners – could this be you?) of the contaminated property for contamination caused by their lessees; landlords (you again?) and lessees for the contamination caused by their sub-lessees; corporate officers in their personal capacity; shareholders; parent corporations liable for their subsidiaries; trustees and personal representatives (personally) for contaminated property owned by a trust or estate; successor corporations; donees; and lenders who foreclose on and subsequently manage contaminated property.

It is beyond the scope of this issue to examine in detail the facts necessary to incur liability for the acts of another (such as your tenant). We may look at this in a future issue. Suffice it to say for now, however, that a whole lot is not required. For example, you, as the owner of property, can be held liable for contamination caused by your tenant; and corporate officers and directors have consistently been held personally liable for the cost of remediating corporate contamination. Similarly, shareholders who are involved in day-to-day corporate operations may be held personally liable for corporate contamination. An entire body of literature has developed to address the dilemma lenders face in financing real property transactions. While the EPA has recently promulgated a new rule to guide lenders, if the lender is too involved in the borrower’s day-to-day operations (because of a loan default or otherwise) the lender may still face liability as an operator.

EXTENT OF LIABILITY. A second important aspect of CERCLA is the extent of the liability imposed. While one might logically think that they should only be liable for their share of contamination, the statute dictates a different result. CERCLA liability is strict, retroactive, and joint and several for costs incurred by federal and state agencies as well as private parties in remediating contamination. Specifically, a PRP is liable for: (i) all costs of removal or remediation incurred by the United States or a given state; (ii) any other necessary costs of response incurred by any other person; (iii) damages for destruction of natural resources; and (iv) costs of any health assessment or health effect study.

Of particular note, and just one more incentive for long-term strategic planning – particularly asset protection planning, is the joint and several aspect of the liability. This means that, between the responsible parties, a court may impose liability equally, proportionally, or all on one party separately. For example: Company X, over a brief period of time, contributes waste to a landfill, along with fifty other parties (generators). Subsequently, it is discovered that the groundwater underneath the landfill is contaminated and that investigation and remediation will cost $5 million. Because of the insolvency or relative insolvency of the other forty-nine generators, Company X could be legally required to pay the full $5 million clean up expense. Furthermore, if certain facts are established, the officers and directors of Company X could be personally liable for this cost. Similarly, if your tenant releases substances on your property which result in CERCLA liability, you may be liable for the full cost of the clean up if the tenant is insolvent or otherwise unavailable. CERCLA enforcement aggressively seeks out deep pockets. Properly implemented asset protection planning can remove you from the deep pocket category.

What about contractually shifting the risks arising from CERCLA liability? This will only be effective between the parties – under CERCLA, PRPs remain ultimately liableindemnification agreements will not cure liability once it attaches.

CONCLUSION. Today’s reality, as well as tomorrow’s, is that environmental liability cannot be ignored; properly implemented advance asset protection planning is an effective means to avoid a financial catastrophe from this exposure. Advance planning of this type is legal today – but who knows what tomorrow will bring. One thing is certain – if this type of planning is made illegal in the future, such a law can only be applied on a prospective basis, leaving those who act now protected, and all others unprotected.

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